Top Market Timing: Can Q2 Earnings Keep the Rally Alive?

U.S. stocks are hovering near record highs as Q2 earnings season kicks off. Investors are asking: where’s the next big opportunity? So from the perspective of market timing, what is the current risk-reward setup?

We are now in the middle of the Q2 earnings season. To time the market properly, one must first understand corporate performance. So far, 12% of S&P 500 companies have reported their second-quarter earnings. Specifically, 83% have beaten revenue expectations—well above the past 1-year average (62%), 5-year average (70%), and 10-year average (65%).

Now let’s look at profitability. Among the companies that have reported so far, average earnings have exceeded market expectations by 7.9%—higher than the past 1-year (6.3%) and 10-year (6.9%) averages. Although it is lower than the past 5-year average of 9.1%, that 5-year figure includes extraordinary policy stimulus in 2020, which makes it less representative.

Better-than-expected corporate earnings are a solid foundation for the U.S. equity rally. In the coming days, the "Magnificent Seven" will release their results, which could further energize the market.

📈 The S&P 493 Earnings Growth Catch Up to Meg 7

Speaking of the “Magnificent Seven,” let’s take a closer look. The chart shows the projected earnings growth of the Seven (blue) versus the rest of the S&P 500—the “S&P 493” (green).

In the coming quarters, the earnings growth gap between the Seven and the S&P 493 is expected to narrow. This means that sectors outside of technology could outperform. DataTrek’s top picks are financials and industrials.

If the earnings advantage of the Magnificent Seven fades, should their valuation premium also disappear?

Data proves it already has. The chart below shows how much the Seven have outperformed the broader S&P 500 since 2015. Over the past decade, these tech giants consistently beat the index, with outsized gains during the 2020 stimulus era and the late-2023 “ChatGPT moment.” But in 2025, their returns have largely tracked the S&P, with little to no excess return. This reflects their fading earnings edge and a diminished valuation premium.

Still, a company’s valuation depends not only on earnings growth but also on competitive advantage. Firms with deep moats can maintain superior profitability for long periods and deserve higher valuations. While tech giants are losing their earnings growth edge, their business moats remain solid.

It’s likely the Magnificent Seven will retain some valuation premium over the S&P 493 for a long time to come—but don’t expect them to outperform the broader market the way they did in 2020 or 2024.

🩺 Health Care: An Overlooked Opportunity?

Now let’s move on from tech to U.S. health care stocks. Once a consistent bull-market performer, the health care sector has significantly underperformed the S&P 500 since 2021. Could this underperformance present an opportunity?

The chart below shows the relative returns of the health care sector vs. the S&P 500 since 2010. Between 2010 and 2019, health care outperformed, delivering an average excess return of 0.5% over any 100-day period.

Since 2020, however, the sector has consistently lagged behind, with an average underperformance of 2.2% over any 100 trading days. DataTrek believes health care is now significantly oversold. Composed mainly of defensive stocks, it can serve as a hedge against highly valued tech names. It’s also one of only two sectors in the S&P 500 trading below their 10-year average P/E ratio—the other being energy.

As part of a diversified portfolio, the health care sector is worth a second look.